Here's the scenario. To motivate the sales team to sell as much as possible, a company sets up an attractive commission structure, promising to pay successful salespeople a percentage of the revenue from every customer they bring in.
The salespeople work their butts off (and leverage their talents and connections) to rack up huge sales. Now, you'd think the company's management would celebrate that success and gladly pay the commission. But you'd think wrong.
Instead, management balks and instead puts a cap on total commissions ("a salesperson can only earn $x each month") and reduces the commission retroactively so that the salesperson no longer gets paid as much for ongoing business.
Management's logic is simple: why should the company pay money for work the salesperson has already completed? More important, managers think "why should a salesperson be making more than I make?"
What management doesn't "get" is that when you work on commission, you're taking a risk because if you fail, you make nothing, regardless of how hard you worked. The company takes on less risk, because if the salesperson fails, they don't have to pay anything.
When a salesperson accepts a job, they are balancing that risk with the potential reward that they'll receive if they're successful. The higher the risk, the greater the reward.
Now, let's suppose that, based on their reading of that risk/reward equation, the salesperson decides to work for ABC rather than XYZ. When ABC changes the commission structure retroactively, they are changing the reward relative to the risk.
That's like a casino saying "here's a 100 to 1 bet" and you bet a dollar. Then, when you win, the casino says: "Oh, $100 is too much to pay for a $1 bet, so we're only paying you $50." How long do you think a casino that did that would continue to have customers?
When management retroactively changes the commission structure, the salespeople immediately stop caring as much about making sales because they no longer trust the company to make good on their promises. With good reason.
Typically this scenario plays out like this:
- The commission change is announced
- The top salesperson quits.
- The salespeople who remain start selling less.
- More salespeople leave.
- Revenue drops.
Within six months or so, the only salespeople still remaining in the company end up being the ones who couldn't find work elsewhere or new-hires who don't know any better. It is very difficult for most firms to dig themselves out of this situation.
The lesson here is simple: never make retroactive changes in commission structures. You can change the commission structure for new sales, but if a salesperson has been promised a commission, you are obligated to pay.